The UK has a wealth of expertise in computer networking and programming skills. But companies need to look to the US in order to focus their expertise, get finance and capitalise on sales and marketing.
It's been a good year for Madge Networks - the computer networking company set up in a Buckinghamshire farm-building 10 years ago. Sales are running at around $400 million, some 85% of which are outside the UK, and profits are expected to be $17.2 million. In the past year, the company, which now has 1,400 staff, has completed a $400 million acquisition of a data communications company in Israel and launched a range of pioneering products. Robert Madge, chairman and founder, is in buoyant mood: 'We are on track to become the world's number one supplier of the next generation of networking technology for large corporations.' Madge is a good role model for anyone wanting to start up a high-tech venture in the UK. Its success is built on offering a specialised product range to a fast-growing worldwide market. From the beginning, the company focused on exports; it places as much importance on sales and marketing as on product development, and it floated on the US stock exchange rather than in the UK. Having a tight focus is essential in today's computer business - there is no point in launching a head-on attack on IBM or Microsoft. Yet focus is something that UK companies often find hard to achieve because of the small size of the domestic market. 'In small markets, companies often become too complex too early,' says Madge. 'If you are selling in a large market like the US, you can have a very narrow product range and use outside subcontractors for all non-core activities, so you can build a very tight organisation yet generate a large amount of sales.' In a small market, the temptation is to become too vertically integrated, he says.
However, computer networking has proved an ideal niche for UK companies including Madge, Firefox, and, more recently, Advanced Telecommunications Modules (ATM). With some 70% of the world's 100 million PCs now linked in networks, there is vast potential. The UK is particularly well-endowed with networking skills partly because of the early liberalisation of the telecoms market, and partly because in the past many companies ran their own telecoms networks and PBXs. This provides a rich pool of talent from which to recruit staff. In the US, on the other hand, such tasks have generally been subcontracted to telecoms suppliers.
Networking is not the only area of opportunity. The UK also has a wealth of programming skills and UK software houses are building successful international businesses by focusing on specific sectors of the market. Harrogate-based Coda, for example, focuses on accountancy applications. It had sales of £30 million last year, 65% of which was exports. 'Much of our success is because we recognised that every country has different needs from financial software,' says Robert Brown, Coda's CEO. 'Our advantage in coming from the UK is that we are used to dealing with different cultures and currencies, whereas US products tend to be designed to cope with dollars and are ill-adapted to modification for, say, the French or German markets.' In September 1995, Coda won the software industry's annual award for the world's best corporate financial systems, beating the industry giants SAP of Germany and US-based Oracle. 'It is the age-old adage that the Jack of all trades is master of none,' says Brown. Nowadays, customers can reasonably expect to be able to pick and choose the best applications for all their needs, he reckons. 'The idea that one company can be best in every area is a fallacy.' Open computer systems, that run software which conforms to industry standards, will create many more such opportunities.
Much of the software of the future will focus on the development of specialised applications for complex tasks, according to Professor Bill O'Riordan, chief scientist at ICL, the UK-based computer company. Applications include simulation, optimisation, quality assessment, trend analysis, prediction, and decision support. These are areas where the UK excels, O'Riordan says. 'The spread of the Internet is also creating demand for UK skills in network security, including techniques such as encryption and authentication. And the UK is very strong in designing safety-critical systems, partly from our background in building process-controllers for the nuclear power industry.' But the UK market on its own isn't enough to support a high-tech company. 'It's critical to have exposure to markets around the world,' says Madge. 'If you stick to the UK it's bound to be a blind alley.' Playing on the international stage costs money - a resource which can be very hard to come by in the UK, especially for anything to do with computers. The City of London has not forgotten the disastrous days of the early 1980s when a succession of UK computer companies such as Acorn, Sinclair, Apricot and even Amstrad, ran into difficulties. Most high-tech entrepreneurs have had to remortgage their houses, live off their savings, and beg funds from family and friends.
Peter Simkin, who went through this experience as a founder of Firefox, contrasts it with the situation across the Atlantic. 'It's very easy in the US to come up with an idea and trawl around venture capital companies getting $5 million at the drop of a hat.' Companies can get themselves off the ground very quickly, with 80 or 90 employees in 12 to 15 months, he says.
UK venture capitalists and investment bankers still do not understand the computer business. There is not even an 'IT' or 'Computer' category on the London stock exchange. Companies that float have to choose whether to be listed with support services such as cleaning and catering, or with electronics companies. It is hardly surprising that analysts whose job is to cover these sectors fail to grasp the dynamics of computing. The experience of Chris Batterham, group finance director of Unipalm, a UK star performer in the Internet market, bought by UUNet, is typical. 'I only had one UK analyst following me though I finally managed to persuade a couple of others to take an interest.' Many investors approached by Firefox didn't even know what a computer network was. 'US investment bankers and industry analysts understand the marketplace far better than we do, and were able to tell us what our prospects were,' says Simkin. They also do their homework - trailing exhibitions to seek out up-and-coming technologies. 'One of the first banks to approach Firefox knew all about us before it came,' he recalls.
Small wonder so many UK high-tech ventures are choosing to float in the US. For a start, they get a much higher valuation than they would get in the UK. Calculations are based on the business a company expects to do next year rather than its performance last year. This can make a huge difference. When Unipalm was floated on the London stock exchange in March 1994 its shares were valued at £1, giving the company a market capitalisation of £20 million. Just 18 months later, when UUNet of the US made its successful bid for Unipalm, it valued the company's shares at £7.50 giving it a market capitalisation of £154 million.
There was also enormous enthusiasm for Madge Networks and Firefox, which were both floated on Nasdaq. They are now both valued at around $2 billion. 'Another advantage of the US is that you are not expected to pay dividends because investors aim to realise their money on increasing share value,' Simkin says.
Floating in the US helps keep up your profile and hence your sales in that market. Success in the US is crucial for any high-tech company intending to be a world player, says Nigel Hartnell, director of marketing and business strategy at ICL. 'This is partly because of the scale of the market, and also because you have to see what your competitors are doing in the world's most advanced IT sector.' Moreover, as home to the headquarters of many of the world's multinationals, the US is where they buy first and set the purchasing pattern for all their subsidiaries around the world. If your products are not available in the US they will be ignored by the leading industry analysts such as Gartner, Input, and IDC. 'These consultancies are all US focused,' says Hartnell. 'They promote products available in the US so if your products are not there they don't exist.' As many UK companies have found to their cost, it is no good having world-beating products if they are not supported by sales and marketing. The problem is finding the right people to sell, market and manage the ideas.
Few people are more aware of this than Hermann Hauser, co-founder of Acorn and former vice president of research and development for Olivetti. Hauser, who has started 20 companies, was one of the first to market a hand-held pen-based computer, the Active Book, designed to be so easy 'your grandmother could use it'.
But lack of marketing and financial support prevented the product from getting off the ground. A similar fate befell the Cambridge Ring - a networking technology pioneered in Cambridge during the 1980s, combining video conferencing, TV, and data transmission. 'Everyone in the world knew about it, but no success ever came out of it,' says Patrick O'Hearn, CEO and president of ATM, the new company Hauser formed to exploit the technology. 'The UK is high on invention and low on exploitation.' Now ATM has adapted the technology for mass production, is manufacturing it in the US, and plans to sell it around the world. O'Hearn, who is based in California, has spent the past few months putting together a top team of marketing and sales professionals. 'We are going to marry the people with the technology,' he says. 'Cambridge has some of the best engineers in the world. Now the business is being driven by the best marketing and sales people in the world, selling to some of the world's biggest companies.' ATM also plans to target the Pacific Rim where networking is gaining popularity in the consumer market for on-line karaoke. Sales of around $6 million in 1995 are expected to increase to between $15 million and $20 million this year.
So are the UK's computer entrepreneurs getting it right? Most now seem aware of the need for a tight focus combined with global marketing. Industry trends are also playing into their hands. Big is no longer beautiful in many areas of computing: customers prefer working with smaller groups of specialists who form dynamic business relationships to address specific market opportunities, so-called 'virtual corporations'.
The fact that so many US companies come to the UK first, creates a vibrant market and a good testing ground, says Hartnell. 'Once US companies have notched up their first $1 million sales, they come to London, look for a small office near Heathrow, and start to trade. So in some senses, you are already competing with the best of the US within the UK.' The UK has benefited from the early deregulation of financial services, utilities and telecoms, which has created demand for efficiency gains and improved productivity - ideal tasks for IT. UK companies are often better than their US rivals at taking a global view. 'The US market is very fashion-orientated,' says Madge. 'People tend to be caught up in the noise level and can't always see clearly what is happening in the market. This can be more apparent from afar.' The UK is also fortunate in not suffering from the constant merry-go-round of staff. The problem for Silicon Valley start-ups is that no sooner have they begun business than a group of their core staff leave to form their own new venture. The UK seems a stable haven by comparison. But there is no doubt that it is tough - and there are few IT entrepreneurs in the Sunday Times' list of the British rich. 'You do sometimes feel you're banging your head against a brick wall trying to make yourself successful against all the odds,' says Simkin. 'And you often feel a little jealous about how much easier it is for people in the US.'.